Attacking the Spectrum Auction

According to opposition backbencher Paul Fletcher, the federal government’s upcoming 4G spectrum auction is nothing more than a cash grab designed to plug cavernous holes in the federal budget.

His article appeared yesterday on IT News. Unlike that story, I’ll be upfront and point out that Fletcher is an MP in the Liberal Party, and was once an executive for Optus, most notably at the time when that telco was awarded the OPEL contract by the existing (Howard) government, which, to put it mildly, did not end up well.

Having established where he’s coming from, it’s not hard to see where he’s coming from, so to speak. He is also given to overstating his case, and his command of language isn’t stellar (is ‘badly mismanaged’ the opposite of ‘mismanaged well’ or just a tautology?). A lazily bombastic prose style is of course no hindrance to a successful career in business or politics. Question time is mostly a collection of semi-literate oafs bellowing at each other.

And by no means do I mean to suggest that Fletcher is wrong to attack the auction. I don’t doubt that the current Labor government will appreciate having several billion dollars added to the budget. In fact, I suspect no government would cavil at such an outcome. The Howard government didn’t sell off Telstra because they didn’t want the cash.

The question is whether the amount the current government receives is too much, and whether it has damaged the process. The reserve price set for the auction - $1.36 per megahertz per head of population – is indeed very high measured by almost any standard. Estimates are that the auction will thereby net about $2.8 billion in total.

It is also correct that this high reserve price has contributed to the potential for Optus to withdraw from the spectrum auction (we’ll hear a definitive announcement in the coming weeks), although Fletcher probably overstates the extent it did more than confirm Vodafone’s decision not to participate. All the available analysis suggests that Vodafone had declined to participate well-before the reserve price was announced. Seeing the high reserve at worst confirmed them in their stance. Consequently, this auction is looking increasingly like a one horse race, with Telstra being that one horse. Auctions, traditionally, are based around the principal that two or more parties will bid against each other. With only one bidder, the reserve price is just the price, and it become a pointlessly complicated transaction.

So far so good, or bad, depending on who you support. The federal government has not achieved a very good outcome, given that it is entirely likely that Telstra will buy the maximum spectrum allowed (25MHz, or half of the available 50), and that they’ll secure it as ‘cheaply’ as possible.

However, there are a few problems with terming this a ‘cash grab’. Firstly, the federal government has so far resisted business lobbying to free up more spectrum, preferring to leave some in reserve for essential emergency services. That's hardly profiteering. Secondly, Fletcher has yoked this auction to the NBN, most immediately by suggesting that Telstra is well-placed to buy spectrum after being paid $11bn for the copper network.

There are a couple of points here. Most broadly, the spectrum auction is an area upon which the government can legitimately be attacked, without muddying the issue by unnecessarily bringing in the NBN. Fletcher’s prose may be turgid, but his line of attack is typically turbid, which is sadly in keeping with mud-hurling approach preferred by the federal opposition.

More specifically, Telstra hardly requires extra funds in order to buy spectrum, and in any case it won’t receive $11bn as an upfront lump-sum, but over the length of the NBN build. Fletcher asserts, with some justification, that Telstra if it wins the auction will pass on the high cost of acquisition to its customers. This is then erroneously compared to the NBN, whose ‘excessive capital expenditure will need to be recovered through higher prices it charges for services’. This has been emphatically shown not to be the case, unless you’re for whatever reason buying your NBN services from Telstra. 

Stay tuned.